Medicare's Efficiency Over-Hyped, Study Claims

The belief that Medicare is a more efficient system than employee-sponsored health insurance comes under fire in a study that claims there are hidden costs in the government program. "One of the most common, and least challenged, assertions

in the debate over U.S. health care policy is that Medicare administrative costs are about 2 percent of claims costs, while private insurance companies' administrative costs are in the 20 to 25 percent range," says "Medicare's Hidden Administrative Costs: A Comparison of Medicare and the Private Sector," funded by the Council for Affordable Health Insurance, an advocacy group for many of the insurance companies often held up in comparison. But the statement does not really hold up under scrutiny, asserts the study's author, Merrill Matthews, PhD.

Medicare describes administrative costs as a ratio of processing costs divided by claims. In 2003, says the study, the average medical cost for a Medicare beneficiary per year was $6,600. The average medical cost for someone with employer-sponsored health insurance was $2,700. "Because of the higher cost per beneficiary," writes Matthews, Medicare's method of calculation makes administrative costs, albeit unintentionally, appear to be lower than they really are."

Matthews — a prolific economist whose credits include visiting scholar for the conservative Institute for Policy Innovation — also points out that there are more costs associated with Medicare than simply paying claims. "Just imagine all of the congressional and administrative staff time and effort devoted to creating, debating, promoting, opposing, and ultimately passing the Medicare Modernization Act of 2003," the study states. "[N]ot one dime of the money and time spent on that . . . debate appear[s] in Medicare's administrative costs."

The salaries of officials at the Centers for Medicare & Medicaid Services, who are essentially the management team that runs Medicare, are not included.

Matthews also takes on the complaint about the private sector having to pay the cost of advertising and marketing its products. "You may have noticed that CMS has been heavily involved lately in promoting the new Medicare drug benefit," the study says. "Nothing wrong with that, but those are marketing costs, which are ignored in Medicare's administrative numbers."

Private insurers, the study notes, are careful when it comes to paying claims. While that may add to administrative costs, it lowers claims costs. "The government, by contrast, is a claims-paying machine," the study states. "When abuse becomes egregious, the fraud unit steps in — and that effort won't be included in administrative costs."

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